Sep 15, 2021

Democrats release their tax plan.

Democrats release their tax plan.
House Speaker Nancy Pelosi, who now has to keep her caucus together on the latest tax proposal. Photo: Gage Skidmore

Plus, a question about Larry Elder.

I’m Isaac Saul, and this is Tangle: an independent, ad-free, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.”

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Today’s read: 12 minutes.

Democrats tax bill. Plus, a question about Larry Elder and some fascinating numbers on money in America.

House Speaker Nancy Pelosi, who now has to keep her caucus together on the latest tax proposal. Photo: Gage Skidmore

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Quick hits.

  1. California Gov. Gavin Newsom beat back a recall attempt by a decisive margin. With 68 percent of the vote reported, 63.9 percent of voters had chosen to keep Newsom while 36.1 percent wanted to replace him. (The results)
  2. The share of Americans living in poverty dropped in 2020 when government benefit programs and stimulus payments were taken into account, despite the Covid-19 pandemic. But household incomes still fell by 2.9 percent. (The surprise)
  3. Nearly three million Americans used a special six-month period created during the pandemic to sign up for subsidized health insurance, according to the White House. However, the percentage of Americans without health insurance still rose last year. (The enrollment)
  4. A new book alleges that Joint Chiefs Chairman Gen. Mark Milley had backchannel calls with his Chinese counterpart days after the Jan. 6 riots to assure him he would prevent President Trump from ordering a military attack. (The claims)
  5. Former Presidents Bush, Clinton and Obama are banding together behind a new group aimed at supporting Afghan refugee resettlement in America. (The coalition)

Today’s topic.

Taxes. On Monday, Democrats released a new tax plan that would raise rates on corporations and the wealthiest Americans in order to offset some of the spending in their $3.5 trillion reconciliation package aimed at expanding the social safety net and addressing climate change.

The plan, released by the Ways and Means Committee, calls for the top tax rate to revert from 37 percent to 39.6 percent for individuals earning more than $400,000 per year, or $450,000 for couples. There would be an additional 3 percent tax on Americans with adjusted income higher than $5 million a year. The corporate tax rate would rise from 21 percent to 26.5 percent on incomes beyond $5 million (President Biden had pushed for 28 percent). President Biden has promised not to raise taxes on anyone making less than $400,000 a year. These increases are generally in line with his campaign proposals.

On top of the tax increase, which largely reverses the 2017 tax reform passed by President Donald Trump and Republicans, the plan would invest $79 billion in IRS tax enforcement, increase taxes on certain tobacco products, and close a loophole in the buying and selling of cryptocurrencies that allows investors to claim a deduction when selling at a loss. The proposal would also scale back certain deductions for high-income individuals and corporations, but it does not address the $10,000 cap on state and local tax deductions (SALT cap) that Democrats from New Jersey and New York say must be changed to earn their votes.

The proposed tax changes come as Democrats try to unite their caucus in the Senate and the House around concurrent bills: a $1 trillion infrastructure proposal and another $3.5 trillion spending bill that would touch nearly every part of American life. Sen. Joe Manchin (D-WV), a critical member of a Senate where Democrats cannot afford to lose any votes, has said he wants the latter bill to be cut to $1 trillion to $1.5 trillion and also said he opposed raising the corporate tax rate above 25 percent.

Over a 10-year-period, the proposal is estimated to raise about $2.1 trillion more in taxes, according to the Joint Committee on Taxation.

Below, we’ll take a look at some reactions from the right and left, then my take.


What the right is saying.

The right believes the plan will hurt the economy and ultimately hurt middle-class Americans, though some acknowledge that it is marginally better than what the White House initially proposed.

The Wall Street Journal warned that Nancy Pelosi was “marching Democrats to the political gallows.”

“If Americans are successful, Democrats want to tax more of their income. The top individual tax rate will rise to 39.6% from 37%, as Mr. Biden promised. But wait: The higher tax rate will kick in at a mere $400,000 for individuals and $450,000 for married couples. That’s down from $523,600 and $628,300 under current law. This is a steep rate increase on two-earner upper-middle-class families,” the board wrote. “They may reach these income levels after a long career, and only for a couple of years, but Democrats want more than 40% if you include the 1.45% Medicare payroll tax and the 3.8% ObamaCare surcharge on investment income.

“If you make more than $5 million, there will also be a three-percentage-point income-tax surcharge,” the board added. “That would take the top tax rate to something like 46.4%. Add California or New York taxes, and government will take about 60%. Hilariously, the committee figures the surtax will raise $127 billion in revenue, as if the rich will be dumb enough not to find tax shelters… The political myth behind all this is that no one making less than $400,000 a year will pay more. But the economic literature is clear that corporations don’t pay taxes. They are merely the collection vessels for levies that are passed along to some combination of employees, consumers and shareholders. Much of the $900 billion will be paid in smaller wage gains for workers who are already paying a Biden tax from higher inflation.”

In The Washington Post, Henry Olsen said the bill was “slightly better” but would still hurt the economy.

“The tax plan that Democrats on the House Ways and Means Committee released on Monday did one good thing by removing President Biden’s proposal to tax unrealized capital gains upon death, saving many owners of farms and small businesses,” Olsen wrote. “But the plan would still hurt the U.S. economy by making large corporations and the rich pay among the highest marginal tax rates in the world… Many people would surely find this acceptable… At a superficial level, taking more from people and entities that can afford it and giving it to people who need it sounds like an obvious win-win.

“But this ignores the role state and local taxes play in our system, as data from the Organization of Economic Cooperation and Development, a group comprising the world’s richest nations, shows,” he added. “Combined state and federal corporate tax rates already put the average U.S. tax burden on businesses in the middle among OECD nations, at 25.75 percent. The House Democratic tax hike would raise that to more than 30 percent. That combined rate would give the United States the third-highest combined corporate rate in the OECD, behind only Portugal and Colombia. On the margin, this pushes companies deciding whether to locate in the United States or in other countries to take their investment and jobs elsewhere.”

The National Review editorial board called it a “worst-of-both-worlds” proposal that will do real damage to the economy but not raise the money Democrats need for their proposals.

“Democrats here are pulling their usual stunt of assuring lower-income people that higher taxes won’t fall on them, but only on their employers, their landlords, and their grocers, as though their finances were unconnected,” the editors wrote. “In the past, that has been good politics, but it is bad economics… Conservatives are not alone in observing that businesses and other taxpayers respond to these incentives in ways that politicians do not intend. The so-called FACT Coalition (‘Financial Accountability and Corporate Transparency’), which supports higher worldwide corporate taxes and complains about ‘tax havens,’ argues that the Democratic plan ‘may actually worsen’ tax-driven offshoring.

“The House Democrats’ plan is not quite as rapacious as what the White House would like to see and is in some ways more modest in its ambitions than what Senate Democrats would prefer,” the board concluded. “In that sense, it is the better proposal, or, more precisely, the least-bad one.”


What the left is saying.

The left supports the tax increases, though some believe there are missed opportunities.

The Washington Post editorial board said Democrats still have far to go to fund their plans.

“Unsurprisingly, special interests such as the Chamber of Commerce and theAmerican Farm Bureau are lobbying against practically every one of these ideas. Meanwhile, some Democrats would make the price tag even harder to cover. Republicans imposed in 2017 a $10,000 cap on the state and local tax deduction, a regressive benefit for wealthy tax-filers. Democrats from states with high state income tax rates insist that they would kill any bill that fails to roll back the cap, and [Rep. Richard] Neal (D-MA) signaled Monday that the Democrats’ legislation will include some kind of state and local tax ‘relief.’

“If anything, Democrats should be reexamining some obvious pay-fors that Mr. Neal failed to propose, such as closing the carried interest loophole, which allows hedge fund managers to avoid income taxes,” the board wrote. “A carbon tax would help fight climate change, and it would not impact most taxpayers if a chunk of its revenue were recycled back to the public.”

In Bloomberg, Alexis Leondis said Democrats made two big mistakes.

“The first is a failure to close a long-standing loophole in the tax code, which will sabotage a key tax increase Democrats were relying on to deliver enough revenue to finance their programs. The loophole involves the special treatment of investment gains when taxpayers die, a boon to wealthy families when they pass these gains along from generation to generation,” Leondis wrote. “Here’s a hypothetical example: Let's say an investor had bought $200,000 worth of Apple shares that appreciated to $2 million. She wouldn't owe capital gains tax on the $1.8 million of appreciation when she died. In turn, her heir would inherit the $2 million of Apple shares and only owe capital gains tax on the difference between the $2 million and any subsequent appreciation of the Apple stock if and when she sells.

“In another misstep, the Democrats suggested a superficial fix for the special tax treatment enjoyed by fund managers,” Leondis wrote. “Under the current tax code, hedge fund and private equity managers are eligible for a much lower tax rate than most other earners. Their compensation is called carried interest and is considered to be a capital gain, qualifying for a top rate of 20% instead of the current top ordinary income tax rate of 37% paid by most wage earners. In 2017, the tax law enacted by President Donald Trump and a Republican Congress took a swipe at carried interest and said managers had to hold assets they were earning compensation on for at least three years (instead of one year) to qualify for the 20% rate. In Monday's proposal, Democrats moved the goalpost slightly by extending the holding period to five years. Since the average holding period for assets in private equity funds is more than six years, what Democrats are proposing seems highly ineffectual.”

In American Prospect, David Dayen cursed the “artificial scarcity” caused by tying spending and revenue together.

“Democrats, who all seem to regard themselves as tax experts, cannot even agree to simply return to the 2017 status quo, before the Trump tax cuts, which could yield as much as $3 trillion,” Dayen said. “If the issues were being decided separately, you could just move on with designing the optimal spending and borrow for the rest. That’s what centrists like Sen. Joe Manchin (D-WV) did on the bipartisan infrastructure bill, after all. But Manchin, sensing that Democrats would try to delink spending and revenue, counterattacked by disclaiming the very maneuver he endorsed to get the infrastructure bill passed. He raised skepticism to Axios that you could count on long-term economic growth to finance ‘human or soft infrastructure proposals.’ (This is preposterous; academic research routinely shows that public investments of all kinds pay off; every dollar invested in early-childhood educationyields $7.30 in societal benefits, per one account.)

“The taxes have already been eroded, and now we’re seeing the inevitable chipping away of the spending,” Dayen wrote. “Manchin told Axios he would only be comfortable with $1 trillion to $1.5 trillion in spending, and really that’s an expression of what taxes he would be willing to support. The artificial scarcity created by linking spending and revenue is killing this bill.”


My take.

I’m not a tax expert, and as far as I can tell the academia on how corporate and individual tax changes impact the economy is one of the most convoluted debates on the planet. If the “experts” can’t even agree, I’m not going to pretend that I can tell you what this bill’s impact will be. There are too many moving parts right now, too much speculation, and too many outside factors (like Covid-19 still being a serious problem). Those arguments are sufficiently fleshed out above. But there are a few things I see worth pointing out, both from a nuts and bolts perspective and from a political one.

First, it’s important to zoom out and look at where our country is: corporate profits and stock prices are hitting all-time highs while inflation-adjusted wages for workers have barely budged in the last 50 years. I’m hardly the first person to point this out, but we have millions of full-time workers who are struggling to pay rent and eat while some of the nation’s wealthiest CEOs shoot themselves into space. That’s not some Bernie Bro talking point anymore — Republican populist and Democratic progressive politicians are both fond of hammering the “elite” and promising to remember the forgotten working class. Obviously, they differ on how to do it, but my view is that corporate America has had 50 years to prove it will support its workers and provide a strong quality of life, and so far it’s done a pretty piss-poor job.

Second, the corporate tax rate was 35 percent when Trump became president. It’s 21 percent now. Bringing it somewhere between those two numbers is not going to spell the apocalypse for a corporate America that primarily used those tax cuts to buy back their own stocks, hand out one-time bonuses and blow up their profits (rather than long-term investment in their workers). Don’t take it from me. The Wall Street Journalexamined the impact of those tax cuts on corporate America in January of 2020 (before the pandemic) and came to the same conclusion: the bill did not pay for itself, and the benefits were modest, brief or non-existent in nearly all of the intended areas.

What Trump’s tax bill did do that helped many of those workers was reduce the amount a lot of us paid in taxes. When the bill was passed, I was making about $60,000 a year in New York City. My take-home pay went up by about $200 a month, which was a huge boon for me at the time and gave me some breathing room on my monthly expenses. I’m sure many Americans experienced something similar. The good news about this bill is that it shouldn’t impact those savings for a huge swathe of the country, an implicit acknowledgement that reversing course there would either be disastrous politically or bad for the economy (I’m not going to suppose why Biden isn’t touching that).

Politically, what I am surprised by in this bill is that it does so little to address wealth disparity, which seems like an even easier political calculation. Very few people are going to shed tears for Americans making more than $5 million a year — or even more than $400,000 a year — who have to give up a few more percentage points of their income to Uncle Sam. Even fewer probably would have wept for the wealthiest Americans if their inheritances were docked, as there’s very little sympathy in this country for the silver spoon-fed class. Yet Democrats seem to have left those vast fortunes “unscathed,” as Jonathan Weisman and Jim Tankersley put it. Their assessment, that the bill goes after the rich rather than the “fabulously rich,” strikes me as accurate.

Now we wait. How this bill animates certain elements of the Republican and Democratic base will be interesting to see — so will the inevitable concessions and changes as critical Democratic moderates throw their weight around. Whatever your politics, though, this bill is the latest chapter in addressing the widening American class divide and appears to be one element of the Democratic version of how to approach that fracture.


Your questions, answered.

Q: What do you make of the Larry Elder egg incident not getting widespread coverage on the more liberal-leaning news outlets? It's a heinous act and I find it hard to disagree with his "If I were a Democrat” assertion...

— Kyle, New York, New York

Tangle: I wish I had seen this question before the recall election had ended, but I only caught it today. For those who missed it: Elder, who is Black, was touring a homeless encampment in California when a woman in a gorilla mask threw an egg at him. An aide to Elder confronted the woman and she slapped him in the face. Police also said Elder was shot at with a pellet gun earlier in the day.

Frankly, I’m with you. I think if this had been a prominent Black Democrat the story would have been all over the news for days — and it got considerably less coverage from CNN, MSNBC, and other mainstream news outlets than I expected (it made Tangle’s quick hits section). That being said, there is a little bit of working the refs here: True, the story wasn’t covered nonstop for 24 hours, but it wasn’t ignored either. CNN did a couple of brief segments on it; as did MSNBC. Local news outlets covered it, and it got at least a write-up in every single major newspaper I searched.

As for the gorilla mask: Tough to say what that means. A lot of far-left protesters wear masks and it’s totally possible it was just a coincidence. It’s also possible she’s a racist cretin. I really don’t know. Regardless, the attack was extremely ugly and there’s no doubt in my mind that if someone wearing a Trump shirt had thrown an egg at a Black Democratic candidate for governor while they toured a homeless encampment, we would have heard about it non-stop for days.


A story that matters.

Internal documents from Facebook reveal that the company knows Instagram is toxic for teen girls. 32 percent of teen girls said that when they felt bad about their bodies, Instagram made them feel worse, according to a document that circulated inside Facebook in 2020. Facebook has been studying how its photo-sharing app impacts millions of young users, and the company’s researchers have repeatedly found it is harmful to a sizable percentage of them, most notably teenage girls. “We make body image issues worse for one in three teen girls,” one presentation from 2019 read. “Teens blame Instagram for increases in the rate of anxiety and depression,” another piece of research concluded. “This reaction was unprompted and consistent across all groups.” The Wall Street Journal has the story.


Numbers.

  • 1 in 500. The number of U.S. residents who have now died of Covid-19, according to a new Johns Hopkins estimate.
  • $67,521. The median inflation-adjusted household income in the United States last year.
  • 37.2 million. The number of people living in poverty in the U.S. in 2020.
  • $26,246. How much money a two-parent, two-child household needs to make in order to be considered above the poverty line.
  • 20 million. The approximate number of millionaires in the United States.

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Have a nice day.

After about six months of simulator, flight and physical training, a crew of four civilians is set to launch into space tonight. The Inspiration4 crew is participating in a concept drawn from Elon Musk’s SpaceX which wants to send more civilian crew members into space in the coming decades. The launch will be aired live on Wednesday night with liftoff at 8:02 p.m. The crew will spend three days in orbit, flying above the International Space Station. Billionaire Jared Isaacman is the brainchild of this mission and the commander of the flight. (The launch)

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